Just two days after the US Securities and Exchange Commission revealed details of a proposed rule that would ban contact between placement agents and public pension officials, several private equity industry veterans have submitted comments criticising the proposal.
The SEC web site notes a phone conversation between Mary Whalen, head of public policy Americas for Credit Suisse, and an SEC official, although the substance of the conversation was is not detailed. Credit Suisse owns the largest fund placement business in the industry.
Below is the text of several additional comment submissions for the proposed SEC rule, Political Contributions by Certain Investment Advisers.
Brady Pyeatt
Licensed securties professional
I work for a placement agent and this new provision will negatively impact our business. We help private equity funds find institutional investors and public pension funds are part of the mix. We are not advisors, we are advocates for our client and all parties are aware of that. It is the quality of the funds that we represent and the due diligence process that they are subjected to that determines whether or not an investment is made. Some of these new funds will never make it into the market if we and others like us are unable to introduce them. Innovation will be lost and talent will be squandered. The people who were involved in pay to play schemes knew they were breaking the rules and they did it anyway. Don't punish the rest of us for the transgressions of a few. It is unwise and unfair and those who are inclined to cheat will just find another way to do it.
Wesley Ogburn
Portfolio Manager, Stanford Management Company
This commentary relates to the proposed banning of third-party placement agents from soliciting government business on behalf of investment advisors.
The ban could disadvantage smaller and medium-sized investment advisors.
Smaller firms would be put at a disadvantage as they cannot afford to hire and retain full-time marketing and sales staff or could be forced to pass these added costs on to their fund investors
Competition would be reduced as this could increase the relative advantage of larger, consolidated investment firms
The ban could reduce breadth and quality of investment options for many government pension plans as they would have reduced access to smaller investment firms that are often oversubscribed and/or have limited resources to market to a broad swathe of institutional investors.
In addition to their role as third-party marketers for investment advisors, placement agents often have deep and knowledgeable professional staff which thoroughly vets the investment advisors’ product offerings. This research and analysis can supplement the government investor’s due diligence process.
The issue of third-party placement agents differs materially from the MSRB rules/regulations implemented to curb broker-dealers’ use of political consultants to solicit municipal securities underwriting business in the 1990’s.
The third-party placement agents are broker-dealers themselves and are therefore subject to a stricter degree of regulatory oversight/enforcement vs. the municipal “consultants” that banks used to solicit underwriting business from municipalities who were not subject to similar oversight and registration with FINRA
The government client base that investment advisors and third-party placement agents target is different in complexion than the typical municipality that would be addressed with the MSRB rules
Most government pension investment officers are not elected officials as opposed to many municipal county and district officials, who may benefit more directly from political contributions from consultants and third-party agents
Increased transparency and a ban of political contributions by third-party placement agents should be effective in curbing the “pay to play” practices of recent years.
David R. Pohndorf
Managing Director, Source Capital Group
I have worked for twenty years as a registered investment banker, first in the traditional private placement field, marketing debt and/or equity securities to institutional investors, and for the majority of years, specializing in marketing private equity partnership interests to institutional investors, i.e., qualified investors under SEC rules.
I have marketed private equity partnership interests to several public retirement systems, including New York State Common, New York State Teachers, CalPERS and CalStrs.
My last activity with New York State Common Retirement System was in 1991. I would note that at that time, Ned Regan was the sole trustee. I was a principal with the Whitman Heffernan Rhein Workout Fund, which received a $35 million commitment from NYS Common. A couple of years later, a new sole trustee was in place and our fund began to receive invitations to fundraising events for the new trustee with suggested donation amounts. I thought then, as I do today, that such solicitations were illegal, or at least not in the spirit of the law.
At no time over twenty years have I ever made donations to politicians related to any public fund.
The proposal regarding a prohibition of registered private placement agents approaching public funds makes little sense, particularly in light of the following: 1) the problems associated with recent “pay to play” originated in large part because of people employed by state funds who were willing to compromise the investment process; 2) recently registered persons ( with little or no investment expertise ) with “political connections” using such connections to obtain funding for private equity clients; 3) unregistered persons acting as “finders” in violation of SEC and FINRA regulations, using political connections to obtain funding.
With at least 40 state funds active in private equity, as well as a dozen municipal funds, it is very difficult for new funds, or small funds, to communicate with the appropriate investment personnel at these funds, in addition to communicating with endowment, foundation, insurance company and corporate pension fund investor prospects, without the assistance of experienced private placement agents who specialize in private equity fund placement, and who have carefully built productive relationships with the public funds over many years.
In summary, the SEC proposal punishes those placement agents who provide a meaningful service to the private equity fund community while doing nothing to preclude wrongdoing by state and municipal pension fund personnel who continue to work with questionable registered and non-registered persons attempting to win investment commitments on behalf of private equity fund clients.
Ted Carroll
Partner, Small Buyout Firm, CPA
Please stop all this nonsense. Placement agents provide a valuable service to small and midsized investment firms and 99.99% are honest diligent people. Its offensive to see the many large political donors involved in the recent pay to play schemes get to pay fines and adopt hollow policies to avoid real prosecution. Catch and punish the guilty, leave the innocent alone.
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